An enforceable contract need not be in writingJune 24, 2019 | Evan H. Krinick |
Dustin and Brooks have owned a business together for years. They have no agreement. Dustin wants to retire and work on his golf handicap. Brooks wants to keep working and expand the business. They agree that Brooks will buy Dustin’s interest in the business.
They get together with Rory, the company accountant, and they agree that Brooks will buy all of Dustin’s interest in the company. The price will be a formula devised by Rory and payments will be made over 60 months secured by a note with interest.
Dustin and Brooks agree that they will each hire an attorney to prepare an agreement to make it “official.” Dustin hires his father-in-law, Wayne, and Brooks turns to his golfing buddy, Ricky. Initial drafts of an agreement are prepared and exchanged but are not finalized. Issues remain about the interest rate on the note and the notice obligations for a default, among others.
Dustin and Brooks play golf together most weekends at the local country club. Dustin is the better golfer but their matches are usually competitive based on the difference in their handicaps. Each detests losing to the other. Brooks believes that Dustin’s handicap is much lower than his because Dustin has spent too many workdays on the golf course and not in the office. Dustin believes that Brooks’ handicap is artificially high so he can gain an unfair advantage in their matches.
As it would happen, the club’s Governor’s Cup final match is between Dustin and Brooks. Brooks has never won the tournament before and is desperate to see his name engraved on the plaque in the grill room. Dustin has won the event the last three years, and never fails to point out his name on the plaque.
As they play the last hole, the match is tied. Brooks is entitled to a “shot” on the hole due to the handicap difference. Both players are short of the green in regulation, but Brooks’ ball is in the heavy rough. Brooks appears to swing but the ball does not move. Brooks claims it was a practice swing, but Dustin argues that it was a swing and miss, and counts as a stroke. The argument becomes heated, and ultimately Phil, the club pro, determines that Brooks indeed made a practice swing and there is no stroke penalty. After the furor dies down, both players make bogey, and Brooks wins due to his higher handicap. Dustin believes that Brooks cheated and silently vows to never sell his business interest to Brooks.
Wayne and Ricky continue to negotiate the agreement, but Wayne’s positions on all issues become intransigent to the point that Ricky believes that Wayne is trying to kill the deal. And that is what happens – no agreement is ever finalized or signed.
Dustin and Brooks may have an enforceable agreement.
But how can that be? They never signed an agreement and in fact, never agreed on many terms.
In certain situations, the law will enforce a contract where the parties establish reasonable certainty as to its material terms. Price is always a material term, but the price need not be a fixed amount in order to be sufficiently definite – it can be based on an agreed-upon formula, even if the final amount is to be determined by a third party. Further, the fact that the parties lack a written agreement is not an obstacle, so long as the essential terms – the price, the performance and the timing of the performance – have been settled. If one party’s bad-faith negotiating leads to the lack of a final written agreement, the court has the power to enforce the agreed-upon terms and compel the parties to negotiate the remaining terms in good faith.
The lesson: Be aware that the failure to finalize a written contract may not always be sufficient to avoid a binding obligation. Make sure your negotiating strategy takes this possibility into account.
This article appeared in the June 21-27, 2019 issue of Long Island Business News. ©2019 Long Island Business News.
- Evan H. Krinick